India’s $283 billion IT industry is bracing for a period of uncertainty as the United States debates a proposed 25% tax on American companies that use foreign outsourcing services. Analysts and legal experts say the bill, even if unlikely to pass in its current form, could reshape how firms in the world’s largest outsourcing market procure IT services.
The proposed legislation, known as the HIRE Act, was introduced last week by US Republican Senator Bernie Moreno. It seeks to impose a 25% levy on companies that hire foreign workers instead of Americans, with the tax revenue earmarked for workforce development in the US. The bill also aims to prevent firms from claiming outsourcing expenses as tax-deductible.
India’s IT sector, which contributes over 7% to the country’s GDP and counts global giants like Apple, Cisco, Citigroup, American Express, FedEx and Home Depot as clients, has flourished for more than three decades by exporting software and IT services. However, it has often faced criticism abroad for shifting jobs away from local workers.
Analysts warn that the proposed tax comes at a challenging time, with Indian IT companies already grappling with weak revenue growth in their core US market. Inflationary pressures and tariff uncertainty have caused many American clients to delay or scale back non-essential technology spending.
“The HIRE Act proposes sweeping changes that could alter the economics of outsourcing and significantly increase the tax liability associated with international service contracts,” said Jignesh Thakkar, compliance head at EY India. He added that combined federal, state and local taxes could push the levy as high as 60%.
Legal experts expect strong resistance from US firms. “A bill like this would probably face a lot of backlash from US companies that rely heavily on outsourcing, who would likely bring litigation to challenge various aspects of the bill, if it were ever to be passed into law,” said Sophie Alcorn, CEO of Alcorn Immigration Law.
Industry watchers believe sweeping restrictions are unlikely, but a diluted version of the bill or delayed enforcement could still impact business. Analysts also note that US firms’ global capability centres in India, which have evolved into hubs for innovation and R&D, could face hurdles in future expansion.
Despite this, experts stress that the shortage of skilled workers in the US means outsourcing will remain a critical solution in the near term.
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